Issue 41 / June 2018 FE Trustnet magazine

INFLATION BUSTERS

The trusts increasing dividends ahead of inflation

PLAYING THE YIELD DIVIDENDS OF THE EARTH THE DEBT COLLECTORS Alternative sources of The highest-yielding Direct-lending income stock markets investment trusts

Fund, Pension, Trust / Sector Profile / Stockpicker / What I Bought Last Issue 41 / June 2018 Editor’s letter FE Trustnet magazine his issue sees While these sound Elsewhere, Holly In our regular columns, explains how to adjust us return to like the ideal solution Black runs the rule over SVM UK Growth’s your retirement plan if a favourite for income investors alternative sources of Margaret Lawson picks you are made redundant INFLATION BUSTERS T subject among our such as pensioners income in the closed- three stocks set to benefit late in your working life. readers – income. You looking for a core long- ended universe, Emily from a period of upheaval Enjoy reading, The trusts increasing dividends ahead of inflation are no doubt already term holding, the all- Perryman reveals which in the European airline acquainted with the important question global stock markets pay industry and AJ Bell’s PLAYING THE YIELD DIVIDENDS OF THE EARTH THE DEBT COLLECTORS Alternative sources of The highest-yielding Direct-lending income stockmarkets investment trusts AIC’s Dividend Heroes is, do these dividends the highest dividend Ryan Hughes names Fund, Pension, Trust / Sector Profile / Stockpicker / What I Bought Last – the investment trusts increase ahead of yields and I find out that the fund he is using to ISSUE 41 that have increased inflation? Read Daniel AIC Sector Specialist: diversify away from the CREDITS their payouts to Lanyon’s cover story Debt is a lot easier to “hype and hysteria” of investors for at least over the page to find understand than its the equity market. Anthony Luzio TRUSTNET MAGAZINE (FORMERLY INVESTAZINE) 20 years in a row. out. name suggests. Finally, John Blowers Editor IS PUBLISHED BY THE TEAM BEHIND FE TRUSTNET IN SOHO, Contents WEBSITE: www.trustnet.com EMAIL: editorial@financialex- press.net

CONTACTS: Dividends of the earth Best laid plans benefiting from upheaval in the Emily Perryman names the AltRetire’s John Blowers weighs European airline industry Anthony Luzio highest-yielding stock markets up the options for anyone P. 48-49 Editor T: 0207 534 7652 on the planet whose retirement strategy is P. 23-27 disrupted by a redundancy late What I bought last Javier Otero in their working life AJ Bell’s Ryan Hughes says Art direction & design W: www.feedingcrows.co.uk Data hub P. 42-47 Premier Global Infrastructure Crunching the biggest trends Income offers diversification Editorial Gary Jackson down into figures Up in the air away from the “hype and Editor (FE Trustnet) P. 28-29 SVM UK Growth’s Margaret hysteria” of the equity market T: 0207 534 7680 36 Lawson picks three stocks P. 50-51 Rob Langston News editor Fund, pension, trust T: 0207 534 7696 Fidelity Moneybuilder Income, Inflation busters Playing the yield 42 Jonathan Jones Baillie Gifford Japanese Income Senior reporter Inflation risk has returned to Holly Black runs the rule over Growth and Jupiter European T: 0207 534 7640 investors’ list of concerns, but alternative income sources in Henry Scroggs Opportunities find themselves Reporter Daniel Lanyon says a (dividend) the closed-ended universe under the spotlight this month T: 0207 534 7692 hero could save the day P. 13-16 P. 30-35 Sales P. 2-7 Richard Fletcher The opportunities in The debt collectors Head of publishing sales Going global for income volatility T: 0207 534 7662 Anthony Luzio says direct- Richard Casemore and growth Henderson International lending trusts could offer Account manager SAINTS’ Toby Ross and James Income Trust’s Ben Lofthouse T: 0207 534 7669 diversification away from bond Dow explain the advantages reveals where he thinks investing – and a much higher Photos supplied by iStock of equities when investing for volatility is creating income yield, too Cover illustration: Javier Otero income opportunities P. 36-41 P. 8-11 P. 18-21 Cover Story 2 / 3 [ DIVIDEND HEROES ]

Inflation risk has returned to investors’ list of concerns, but Daniel Lanyon says a (dividend) hero could save the day Inflation busters

nvestors have seen both Over the past 18 months or so, the the best and worst of times consumer prices index in the UK has in recent years, to annex an consistently trended above the Bank I opening line from Charles of England’s 2 per cent target, aided Dickens’ A Tale of Two Cities. The by unemployment figures which best of times in terms of enjoying are near to record lows. And some a sustained and substantial rise in analysts expect this to tick higher: equity markets for nine years, with Schroders’ chief economist Keith global growth steadily improving. Wade, for example, has revised up the The worst of times in that anyone group’s 2018 forecast from 2.4 to 2.7 searching for an income has seen per cent, largely as a result of higher their list of potential options cut down oil prices. to a bare minimum and even the most “In the US, which is approaching cautious investors have been forced full capacity, we still expect core up the risk scale into equities or other inflation to move higher over the equally volatile assets. next two years,” he said recently. These conditions have been driven by what has been described as a A double-edged sword “Goldilocks” economy – not too hot to In addition, firms in the UK and US cause inflation or too cold to trigger a are still looking to fill a host of new recession. jobs, while wages are also rising. Inflation, however, appears to be While this is to be welcomed, on creeping up investors’ list of worries. the flipside it could easily feed

FE TRUSTNET trustnet.com Cover Story 4 / 5 [ DIVIDEND HEROES ]

“Equity income trusts by 37.76 per cent, comfortably ahead at least seven occasions a continued bout of high inflation, in particular can be very of inflation. since Job Curtis took presenting a serious challenge for effective in providing an But do the figures stack up over charge more than 25 income-focused portfolios. longer periods of time? Again, years ago. Last year One solution to this quandary inflation-beating return the answer is yes. Data from the Curtis increased the is to look at the AIC’s Dividend with relative stability” AIC shows that the average rate of dividend on the fund by Heroes – the investment trusts that dividend growth among these 10 5 per cent, well ahead of have a track record of consistently trusts over the past 20 years is 220.22 the 3 per cent clocked up increasing their payouts to investors dividend for the highest number of per cent and even the one with the in inflation numbers. over the long term. consecutive years, the average rate of lowest growth figure –Alliance – “Any gearing used by However while some of these have dividend growth over the past decade has raised its payout by more than investment trusts can also help achieved this feat for 50 years in a is 80.73 per cent – more than triple double the 48.37 per cent increase in as markets rise – but it adds to row, have these dividends increased the growth in the consumer prices the CPI. Over 30 years, the average volatility and risk,” Morgan adds. ahead of inflation? index over this time. percentage increase in dividend The answer, in short, is yes. Even the trust on this list with the growth is 755.09 per cent – needless “The importance of Data from the AIC shows that of the lowest rate of dividend growth – to say, this is well above the 116.74 per 10 trusts that have increased their Murray Income – increased its payout cent increase in inflation. dividends in contributing So could these historic to the long-term returns achievements filter through into of shares should not be THE AIC’S TOP-10 DIVIDEND HEROES future performance? underestimated” Number of Dividend yield Compounding consecutive years as at 31/05/18 Company Sector dividend increased (%) Rob Morgan, pension and investment Gavin Haynes, managing director analyst at Charles Stanley Direct, says at Whitechurch Securities, also City of London UK Equity Income 51 4.08 equity income trusts in particular likes investment trusts that have Bankers Global 51 2.17 can be very effective in providing an a proven long-term track record of Alliance Global 51 1.83 inflation-beating return with relative dividend growth, saying this makes Global 50 2.1 stability, especially if you reinvest them excellent core holdings within a F&C Global Smaller Companies Global 47 0.91 dividends to produce a compounding portfolio focused on equities. Foreign & Colonial Global 47 1.52 effect. This is partly down to “The importance of dividends investment trusts’ use of gearing to in contributing to the long-term Brunner Global 46 2.08 enhance returns and their ability to returns of shares should not be JPMorgan Claverhouse UK Equity Income 45 3.57 hold back up to 15 per cent of their underestimated and through the Murray Income UK Equity Income 44 4.24 revenue each year, which they can power of compounding, reinvesting Witan Global 43 2.08 use to smooth dividend payments. dividends can significantly enhance City of London has used its reserves Source: The AIC to meet a growing dividend target on

FE TRUSTNET trustnet.com Cover Story 6 / 7 [ DIVIDEND HEROES ]

terms of buying a get or has been cut. So you need to do Morgan adds that while investors lower-yielding trust your research,” Lowcock warns. are naturally attracted to investments so as to obtain more that produce a high level of income, income in terms of the Magnifying effect they should always question whether total return,” actual amount paid out over the It should also be noted that headline this is sustainable. he adds. long term. yields on investment trusts can be “Often companies that grow their “Although it is hard “If you have the time, it is far skewed by their relative discount or dividends over time produce more to avoid the adverse more important to focus on a premium. Morgan says investors need income in the long term and better effects that a short-term rising dividend than the absolute to take this into account as well. share price growth, too.” inflationary shock will have on yield today,” he says. “Ideally you want an investment A very high yield can be a sign that stock markets, over the long-term These trusts that have low but trust whose portfolio produces a a portfolio may offer an initially the ability to grow dividends greater growing dividends are likely to sustainable and growing income, but generous but a flatter income profile than inflation is a good investment become highly valued by investors which trades at a discount so as to over time, and a lot of inflation can strategy,” Haynes adds. when the payout increases. This magnify the yield you receive on your happen in half a century. 1,609.5 per provides both capital appreciation investment,” he explains. cent to be precise. A surprise hit and larger dividends over time. Neither Morgan nor Haynes forecasts a “However, investors shouldn’t choose huge uptick in structural inflation in the one exclusively over the other as both GROWTH IN DIVIDENDS VS INFLATION OVER 30YRS short term but Haynes says that there routes can provide opportunities at a Dividend growth Dividend growth Dividend growth could be a surprise hit at any time. trust level,” Lowcock says. 1987-2017 1997-2017 2007-2017 “With so much dependent upon Of the 10 trusts on the list, for central bankers managing interest example, F&C Global Smaller F&C Global Smaller Companies 1077.88% 350.37% 161.90% rates correctly, the scope for policy Companies increased its dividend Witan 831.82% 208.27% 118.09% error does mean that inflation risks at the fastest rate over the 10 years Foreign & Colonial 1053.41% 326.47% 82.88% need to be monitored closely,” he says. to the end of 2017, at 161.9 per cent. Adrian Lowcock, investment Yet its low starting yield meant Bankers 1042.86% 266.53% 81.10% director at Architas, says one tactic someone who invested £10,000 at Caledonia Investments 855.17% 187.05% 75.87% that can be used to tackle this the start of this period would have Alliance 415.45% 130.60% 72.38% problem is to take an upfront hit in received just £1,865.04 in income over JPMorgan Claverhouse 767.26% 274.05% 63.33% this time – less than half the £5,064.76 Brunner 500.00% 153.85% 54.21% Trusts that have low but paid by City of London, which had a far lower dividend growth rate of 59.75 City of London 603.31% 164.84% 59.75% growing dividends are per cent. Murray Income 403.73% 140.21% 37.76% likely to become highly “Such calls are hard as you could Average 755.09% 220.22% 80.73% end up investing in a dividend CPI 116.74% 48.37% 26.39% valued by investors when trap where the dividend looks high the payout increases historically but actually is likely to Source: The AIC/FE Analytics

FE TRUSTNET trustnet.com Advertorial feature 8 / 9 [ BAILLIE GIFFORD ]

Toby Ross and James Dow, joint managers of the Scottish American Investment Company (SAINTS), believe the attraction of equities for an income investor is that they offer scope for both income and growth

Going global for Today, in the UK, the FTSE All-Share offers income and growth an apparently enticing yield of 3.85% p.a. – at a time when returns on cash are exceptionally low. However, our estimate is that around 10 companies account for hareholders own a slice of a reasons for owning assets like over half of the dividends real, cash-generating business. bonds, but for an investor’s paid by the index, with three If that business grows its portfolio-income to keep pace (Royal Dutch Shell, HSBC Sprofits, then over time it with inflation over the long term, and BP) representing almost should increase its dividends, and its these holdings must be balanced with one-third of the total. This raises capital value should also grow. If there income-generating assets that are problems for those investing in the is a big growth opportunity facing the also capable of delivering growth. index for both income and growth. company, and it has a differentiated UK investors have historically Investors should probably not choose way of seizing it, this growth can understood this and have had large The ability to deliver both an income stream that is so exposed significantly outpace inflation. allocations to income-generating income and growth is the to the dividend decisions of such a In our view, the ability to deliver equities. However, their equity small number of company boards, both income and growth is the investments have generally been key reason that many especially those in the notoriously key reason that many income- restricted to the domestic stock market. income-seeking investors volatile oil and gas sector. A particular seeking investors should want to We believe this is no longer should want to own equities problem is that several of these own equities. Although they may appropriate, for two reasons. First, businesses are currently distributing have other investments offering the UK equity market has become too much of their profit as dividends. income today, such as bonds, the profoundly skewed. Its income stream payers in other countries. We think In fact only two of the 10 largest income from those investments is is now dominated by a small number these opportunities overseas can offer dividend distributors are retaining unlikely to keep pace with inflation of unwieldy businesses, which we investors both a dependable income more than half of their earnings. This over time. The capital value of struggle to see growing or even stream and long-term growth, vastly is a warning sign because retained these investments is also at risk of sustaining their dividends. Second, improving the prospects of a UK profits are crucial to these businesses erosion by inflation. There are valid there are many exciting dividend income investor’s portfolio.

FE TRUSTNET trustnet.com Advertorial feature 10 / 11 [ BAILLIE GIFFORD ]

broader horizons allows us to listed in other markets, but this SAINTS total dividend 2013 2014 2015 2016 2017 take positions in businesses for approach allows us to construct a per ordinary share (net) which rapid technological change more diversified, dependable income - pence per share 10.2 10.5 10.7 10.825 11.1 is an opportunity, rather than an stream than if we were constrained Source: Baillie Gifford & Co, data as at 31 December each year. existential threat. Many are run by only to the UK market. experienced managers with a strong Our extensive range of opportunities commitment to returning cash to allows us to find 60-70 stocks for possible range of companies to shareholders through dividends. SAINTS’ portfolio which meet our choose from, so that the income- While there are no guarantees of criteria, and enables us to diversify if they are to deliver future growth, or seeking investor can be both selective success, companies like these have an stock-specific risks to the income build up a buffer for tougher times. and well-diversified. opportunity to grow their profits and stream. We impose a 5% limit on the In our view, income-seeking By looking globally for SAINTS, cash flows rapidly over the next five contribution that any one stock can investors are far better off looking we have a universe of over 2,300 to 10 years and more. If they can seize make to the portfolio’s income. At the overseas for at least part of investible, established, dividend- the opportunities facing them, then end of December 2017 the SAINTS’ their income. By going global, paying stocks available to us. This is not only will they be able to pay out top 10 income contributors accounted investors can find an abundance of over 10 times the number we would significantly higher dividends, but for less than 30% of its income. companies that have exciting growth be able to choose from if we were the capital value of these businesses We believe our strategy enables opportunities ahead of them. Better restricted solely to the UK market. is likely to grow substantially too. SAINTS to provide its shareholders still, many of these companies have It’s not just the far larger number There’s an additional benefit of with a dependable source of cash-generative business models, of dividend-paying businesses searching globally for income and income, together with growth in that by their nature are far better that excites us about going global. growth. Not only are we able to find income and capital that exceeds suited to delivering growth in It’s also the impressive quality of many resilient, growing businesses inflation over time. profits as well as income. Software those that we uncover in other companies, for example, typically markets around the world. Having have limited investment needs to Data to 31 March 2018 unless otherwise stated. Past performance is not a guide to future returns. Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get grow their business. They are far back the amount invested. Investments with exposure to overseas securities can be affected by changing stock better positioned to deliver both market conditions and currency exchange rates. The trust can borrow money to make further investments (sometimes It is helpful to have the known as “gearing” or “leverage”). The risk is that when this money is repaid by the trust, the value of the investments income and growth to shareholders may not be enough to cover the borrowing and interest costs, and the trust will make a loss. If the trust’s investments than, say, an oil company where broadest possible range fall in value, any invested borrowings will increase the amount of this loss. Investing in emerging markets is only growth requires huge outlays of suitable for those investors prepared to accept a higher level of risk. This is because difficulties in dealing, settlement of companies to choose and custody could arise, resulting in a negative impact on the value of your investment. A Key Information Document capital expenditure every year. is available by visiting www.bailliegifford.com. The views expressed in this article are those of the individual managers Cash-generative businesses with from, so that the income- and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when good growth opportunities and a seeking investor can be making investment decisions. Baillie Gifford & Co Limited is the manager of SAINTS and is authorised and regulated commitment to paying dividends by the Financial Conduct Authority. The investment trusts managed by Baillie Gifford & Co Limited are listed on the both selective and well- and are not authorised or regulated by the Financial Conduct Authority. The index data are not, admittedly, common. It is referenced herein is the property of one or more third party index provider(s) and is used under license. Such index helpful therefore to have the broadest diversified providers accept no liability in connection with this document. For full details, see www.bailliegifford.com/legal

FE TRUSTNET trustnet.com Your portfolio 12 / 13

Investors willing to look beyond mainstream asset classes in search of income will find a variety of options in the closed-ended universe, writes Holly Black Playing the yield

he ability of investment income-producing areas of the market trusts to “smooth out” their that are often denied to open-ended dividend payments is well funds. While most of these alternative T documented. However, just areas should not be used as a core as important for income investors component of investors’ portfolios, is the closed-ended structure of they can help provide some valuable these vehicles, which allows them income diversification when held to invest in illiquid areas. This has alongside equities and bonds. Here are given investment trusts access to some of the available options.

trustnet.com Your portfolio 14 / 15 [ ALTERNATIVES ] Renewable Peer-to-peer energy Peer-to-peer lending, which has their money spread across a number grown in popularity in recent years, of loans to provide diversification. Renewable energy under more generous sees savers lend their money to But even a £10,000 investment trusts own assets such terms and as new individuals or businesses through a broken up into £10 chunks would as solar panel fields money is raised middleman website in exchange for a only gain exposure to 1,000 loans. and wind turbines, by trusts, it will be set rate of interest over a fixed period. The trusts mentioned above have generating an income invested under less Now trusts have been launched teams of experts who carry out due from the sale of the generous agreements,” offering access to these loans, diligence on all of their investments. energy they produce. renewables that rely says Ben Yearsley, bringing investors the benefits of Yearsley says: “The argument for The main attraction on subsidies, as these director at Shore liquidity and diversification. using these trusts is diversification of renewable energy have been cut in recent Financial Planning. P2P Global Investments, which and the fact you can buy and sell investments is the years. However, these It is worth noting yields 6.01 per cent, has £625m of when you want. The yields look reliable yield, which is reductions do not apply installation costs are assets spread across consumer and attractive but investing through a often inflation-linked to existing projects, only falling, which makes business loans in the UK and US, as trust rather than directly can be more and guaranteed by new ones, so the income subsidies less important. well as some in European real estate. expensive and some of them are subsidy payments from of established trusts is Yearsley likes Foresight Meanwhile, VPC Specialty Lending trading at a premium.” the government. well protected. Solar, which yields 5.9 has exposure to more than 2.1 million Concerns have recently “This means there per cent, and Greencoat different loans in its £330m portfolio been raised about the is a finite group of UK Wind, which yields and yields 10.23 per cent. investment case for investments operating 5.4 per cent. Investors who approach a peer-to- peer provider directly can opt to have PERFORMANCE OF SECTORS

Discount/ Infrastructure Sector 1yr (%) 3yr (%) 5yr (%) 10yr (%) Yield (%) premium (%)

IT Debt 2.57 16.95 20.87 347.1 6.52 -1.39 The collapse of high- a hit recently. But for hospitals, roads and profileoutsourcing investors who believe in street lights. Their main IT Infrastructure -1.7 19 49.35 131.39 5.23 +2.25 outfit and the long-term potential customer is often the concerns about the of these assets, this could Government, which IT Infrastructure Renewable Energy 0.95 23.67 38.25 N/A 5.95 +6.39 future for the sector were be an opportunity to buy means they have long- a Jeremy Corbyn-led at a discount. term contracts which IT Property Direct UK 2.6 17.54 64.51 74.06 5.09 -0.3 Labour Party to enter Infrastructure trusts provide a reliable, often government have seen own and operate inflation-linked, income. Source: FE Analytics/The AIC infrastructure trusts take assets such as schools,

FE TRUSTNET trustnet.com Your portfolio 16 / 17

challenges for those that Rob Morgan, service infrastructure investment analyst at Matthew Yeates, projects.” Charles Stanley, prefers investment manager He likes HICL International Public at 7IM, says: “Listed Infrastructure, which Partnerships as one of the infrastructure can be has assets in the US, larger, more established part of the solution and Europe, and diversified trusts for investors trying to including a prison available to investors. It balance risk and get an in West Lothian, is yielding 4.9 per cent income, but the sector schools in Kent and and operates a school in is not immune to ups roads in France and Canada, a health centre and downs and Carillion the Netherlands. It is in and an HMRC has cast light on the yielding 5.5 per cent. office in Liverpool.

Commercial property

Property trusts own so-called bricks & mortar assets such as offices, shops and warehouses, generating a reliable income stream from the rents they receive from tenants. of property, with tenants including The downside of these assets is that Aldi, Costa Coffee and Travelodge. they are illiquid and may be difficult It is yielding 3.7 per cent and has an to sell in a hurry. They can also suffer average lease of more than 20 years. bouts of negative sentiment as was Morgan prefers F&C Commercial seen following the UK’s vote to leave Property, which has some 60 per cent the EU in 2016, when trusts saw their of its assets invested in London and share prices plunge by as much as the South East, with a bias towards 40 per cent amid fears of a property office and retail space. The trust market collapse. yields 4.1 per cent and pays a monthly Yeates highlights LXI Reit, which dividend, which is particularly has investments in hotels, care homes appealing to anyone who is hoping to and car parks, among other types live off the income generated.

FE TRUSTNET Advertorial feature 18 / 19 [ JANUS HENDERSON ]

Henderson International Income Trust’s Ben Lofthouse gives his thoughts on where income opportunities are emerging amid global stock market volatility The opportunities in volatility

olatility has just a few years ago and crept back into is a clear reflection of the global markets changing times. V after a good run Janus Henderson’s latest in the past few years, but it is Global Dividends Index good news for active income revealed tech stocks have investors (i.e. a team of fund grown their dividends far managers that aims to beat an more than any other sector index rather than a fund that since 2010, while bottom of the tracks an index). Uncertainty class is utilities, which is also in markets is an advantage for the smallest sector weighting active stock-pickers and we are in the portfolio (<5%). seeing plenty of opportunity Dividend growth momentum to add high dividend-paying has been evident in the tech stocks at good valuations to sector for some time and we the Henderson International have been monitoring the Income Trust. Technology stocks have gradually become important Tech stocks have names in the Trust’s portfolio, grown their dividends which is not something you would have heard from an far more than any income-driven fund manager other sector since 2010

FE TRUSTNET trustnet.com Advertorial feature 20 / 21 [ JANUS HENDERSON ]

Prioritising prudency are worried about lots of things but Valuations are important The purpose of HINT is to provide the actual level of the market has technology companies globally for to total return, income is global diversification and that means appreciated a lot over the last couple opportunities to buy at attractive one part of it, and the value maintaining a diversified portfolio of years, so we’ve allowed the gearing valuations. both geographically and on a sector to run down. There are several technology stocks at the point of investment basis. The US is our biggest country Looking ahead, the global dividends in the Trust’s top ten holdings, also has a significant weighting (36%), with China (9.3%), prognosis is good. Dividends tend including Taiwan Semiconductor France (8.7%), Germany (8.3%) and to lag earnings, which are strong, Manufacturing (2.7%), Cisco Systems impact on your longer term Switzerland (8.1%) completing the top and the tax changes in the US are (1.9%) and Microsoft (3.7%), which is capital returns five country exposures. generating much higher earnings also the Trust’s largest holding overall. As well as maintaining sufficient with some of that expected to come diversification, it is also important back in dividends. Commodity Active advantages Banks make up roughly 15% of the to consider value. Valuations are prices are higher, which in part will An advantage of volatility in markets Henderson International Income important to total return, income generate much more sustainable for active managers is the ability to Trust (HINT) portfolio and our is one part of it, and the value at dividends and on top of that interest capitalise on nascent trends – and exposure is globally diversified, the point of investment also has a rates are still low, so I think we could the reversal of trends. For example, including but not limited to Japanese significant impact on your longer see good dividend growth over the oil companies and banks are showing group Mitsubishi UFJ Financial, term capital returns. next 12 months. signs of a return to their high- China Bank, Natixis The Trust is currently not using the dividend paying days pre-financial and Nordea, while Dutch banking gearing facility (the ability to borrow crisis. This comes after a substantial conglomerate ING Groep is the largest money). We have the ability to add period of financial turbulence for bank holding in the portfolio at 2%. up to 25% and we have been up to both sectors. The oil sector’s dividend-paying 16% before. We tend to be counter The financial sector was targeted by ability suffered after a pretty hefty cyclical to the market with the regulators around the world in the shock between 2014 and 2015 when gearing, so by that I mean investing wake of the crisis. In the main, banks, the price of crude oil dropped more in companies whose attractions are insurers and lenders were instructed than 50%. Following that shock, many underappreciated and using the to improve their balance sheets with companies were failing to cover their gearing when people are worried stronger reserves and rainy day dividends even when oil was $100 per about markets. At the moment people money. That did lead to a dip in the barrel a day. sector’s dividends for some time. Now they are very focused on Before investing in an investment trust referred to in this article, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. Past performance is not a guide to future performance. The value of an investment and the income Since then, lots of financial companies generating cash and for the first time in from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the have been increasing capital positions years they are covering their dividends sale or purchase of any investment. Stocks are intended for illustrative purposes only. Janus Henderson Investors, one of its affiliated advisors, and economic growth has helped with cash. We have been increasing or its employees, may have a position mentioned in the securities mentioned in the article. References made to individual securities should not constitute or form part of any offer or solicitation toissue, sell, subscribe or purchase the security. Issued in the UK by Janus Henderson them improve their financial health, exposure to them gradually over the Investors. Janus Henderson Investors is the name under which Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), so we are seeing better than expected past 18 months with the additions Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at growth from the banking sector across to the portfolio of US companies 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. © 2018, Janus Henderson Investors. The name Janus Henderson Investors includes HGI Group Limited, Henderson Global Investors the board. Occidental Petroleum and Chevron. (Brand Management) Sarl and Janus International Holding LLC.

FE TRUSTNET trustnet.com Your portfolio 22 / 23

You can travel to some of the most far-flung areas of the planet for the juiciest dividend yields. But, Emily Perryman asks, is it worth the extra risk? Dividends of the earth

ith yields of 5 to 6 per the 10 highest-yielding countries, cent, countries such compiled by Fidelity using the MSCI as the Czech Republic, AWI Index, shows the Czech Republic W United Arab Emirates comes out top with an impressive (UAE) and Australia offer investors figure of 6.6 per cent. the chance to boost their income in However, Jason Hollands, managing what is an otherwise challenging director of business development and environment from this point of view. communications at Tilney, points out This doesn’t necessarily mean you that the MSCI Czech Republic index should close your eyes and leap only has four stocks. A single utility with both feet, however. Some stock company, České Energetické Závody, markets exhibit risky characteristics comprises 41 per cent of the market, which mean they’re only suited to the with two banks making up another most adventurous and experienced investors. For example, a list of

trustnet.com Your portfolio 24 /25 [ HIGH YIELD ]

HIGHEST-YIELDING 6.6% 4.7% 4.7%

STOCK MARKETS Czech Republic Pakistan UAE

4.7% 4.6% 4.6%

Qatar Australia Portugal

4.4% 4.3%

Russia Finland

4.2% 4.2%

Source: Fidelity. Data from MSCI AWI Index as at 25/05/2018 Norway UK

Pakistan and Russia, which yield 4.7 “If a stock market is seen Even markets such as Norway and per cent and 4.4 per cent, respectively. the UK, which both yield 4.2 per cent, 50 per cent. “Utilities and banks are Russian stocks in particular as risky, investors may are at risk of declining dividends. typically higher-yielding sectors in look cheap compared with other well demand a higher yield “Both countries get a big chunk of most markets,” Hollands explains. markets – a discount which Hollands as part of the premium dividend payments from oil stocks, A similar picture emerges when says reflects concerns about poor so if OPEC turns the taps back on and looking beneath the bonnet of the corporate governance and the returns they’ll be seeking to crude prices fall, investors may take a UAE and Qatari stock markets, which impact of sanctions. compensate themselves” more cautious view,” warns Mould. both have yields of 4.7 per cent. Russ Mould, investment director at MSCI UAE has just 11 constituents, AJ Bell, agrees with him: “If a stock Home turf with a third each in banks and real estate market is seen as risky, for reasons of any stock market offering high yields Investors who prefer to stay closer to companies. Likewise, MSCI Qatar only geopolitics or corporate governance, for usually contains risks somewhere home will be relieved to see the UK has 12 constituents, 61 per cent of which example, investors may well demand along the line. appearing at 10th place on the list. are financials, with the largest holding, a higher yield as part of the premium He says the main threat to Australia’s Despite some concerns about the Qatar National Bank, representing 30 returns they’ll be seeking to compensate 4.6 per cent yield is its housing market, FTSE 100’s heavy oil exposure, it is per cent of the entire index. themselves for the risks involved.” which has long been regarded as analysts’ preferred option in the top- Aside from sector concentration, overstretched. 10 by some distance. some stock markets have high Economic concerns “If it comes a cropper and punctures Laith Khalaf, senior analyst at yields to reflect the so-called “risk- Australia and Finland sound like less the banks’ earnings power and cash- Hargreaves Lansdown, says: “The premium” for investing in these risky investment options than those in flows, this could leave their dividend countries. This is true of areas such as the Middle East, but Mould warns that payouts exposed,” he adds.

FE TRUSTNET trustnet.com 26 / 27 [ HIGH YIELD ]

UK is trading near the middle of its historical range and is out of favour on the global stage because of political uncertainty. This makes 41% it a reasonable destination for Utility company České investment, particularly because it Energetické Závody’s share offers a pretty decent yield.” It is worth remembering that the UK is of the Czech Republic’s home to a diversified pool of companies stock market which, in aggregate, earn most of their earnings from abroad. This means they are less exposed to the domestic economy than their counterparts in More than half of Baring Emerging other mainstream indices. Europe’s assets are invested in Russia, “Ironically, though, private investors with 3 per cent in the Czech Republic. have been consistently ditching UK The trust has a 4.6 per cent yield and equity income funds each month for is on a 12.5 per cent discount. about a year and a half now, against BlackRock Emerging Europe has 54 a backdrop of Brexit uncertainties,” per cent of its assets in Russia and says Hollands. is yielding 4.4 per cent, but is on a discount of just 1.8 per cent. Pick and choose Gulf Investment Fund, meanwhile, Investors who want to get exposure invests in members of the Gulf to the attractive yields of the top Cooperation Council (GCC), which 10 countries can build a diversified include Bahrain, Kuwait, Saudi Arabia, portfolio using investment trusts. and Oman. The trust is yielding 3 per cent and is on a 17 per cent discount. However, Hollands cautions against “Private investors have been chasing obscure markets, particularly for someone who is relying on regular consistently ditching UK dividends to live off. A less risky equity income funds each option is a global equity income trust month for about a year and a such as Murray International, which has more than 40 per cent of its assets half now, against a backdrop in emerging markets and 12 per cent of Brexit uncertainties” in the UK.

trustnet.com Data hub 28x / 29x

Crunching the biggest trends down into figures

The importance of income In the IA UK Equity Income sector…

stocks account 83% 10 for 40% of the of funds hold 7.25 sector’s yield Royal Dutch Number of Shell years Apple’s 2017 dividend of $12.8bn 32% 98.22% would of funds have fund the 1.5x Increase in value of £100 lost money salary of invested monthly in FTSE in capital every player All Share over 30 years with terms over in the dividends reinvested (£140,585) three years. Premier compared with when they aren’t None have League (£70,923) lost money in total return 60% of funds terms have weighted average dividend cover across their top 10 holdings below this level

Source: Neptune

The last year City of London, Bankers 61.63% and Alliance investment trusts failed to increase their dividend of funds derive more than 40% of their yield from their Source: The AIC, Fidelity International, Sportingintelligence, FE Analytics top-10 holdings

FE TRUSTNET trustnet.com In focus 30 / 31 [ FUND ]

Ian Spreadbury’s fund has underperformed in the rally of the past few years, but is likely to prove its worth in a downturn

The team at Square Mile Investment “He has established a prudent and Consulting & Research described FE well-considered­ approach to ensure the Fidelity Moneybuilder Alpha Manager Spreadbury as “an fund is well diversified,” it said. extremely experienced manager” who Fidelity Moneybuilder Income has has built up a strong reputation for made 82.88 per cent over 10 years, Income successfully managing fixed income compared with 70.29 per cent from the funds over a number of market cycles. IA Sterling Corporate Bond sector.

FACT BOX

MANAGERS: Ian Spreadbury & Sajiv Vaid / LAUNCHED: 12/09/1995 / FUND SIZE: £3.8bn / hile some central banks “What we are doing is constructing OCF: 0.56% such as the Federal Reserve a portfolio that is an outcome resting W have already made moves on three key attributes: a good level FE CROWN RATING towards “normalisation” of monetary of income, modest volatility and low policy, others have yet to hike rates correlation to equities,” said Vaid. PERFORMANCE OF FUND VS SECTOR AND INDEX OVER 10YRS or withdraw quantitative easing (QE). The fund’s process allows it to When they inevitably embark on this invest in less popular parts of the ICE BofAML Euro - Sterling (90.10%) process of tightening, returns may fixed income market, including non- be more difficult to generate in the cyclical areas such as utilities, asset- Fidelity Moneybuilder Income (82.88%) ensuing low growth/low inflation backed securities and bonds with IA Sterling Corporate Bond (70.29%) environment, which is why Ian some kind of covenant or security to Spreadbury and Sajiv Vaid, managers protect the investor. 100% of the £3.8bn Fidelity Moneybuilder With returns for fixed income assets 80% Income fund, believe a focus on likely to be lower in the post-QE era, downside protection will be prudent. why then should investors consider 60% Fidelity Moneybuilder Income aims adding bond exposure? to deliver an attractive monthly income “I think it comes back to one main 40% through holding a range of higher- driver: the role of bonds and fixed quality, investment grade bonds. income as a clear diversifier to equities 20% As such, it performs better during by their low correlation,” Vaid added. 0% downturns – and the fact the market “That correlation in the last few hasn’t seen one of these since the first months may have broken down and -20% quarter of 2016 helps to explain why is more positive, but if you look at the fund has lagged its peer group over the longer-term, [the correlation] has Jun08 Jun09 Jun10 Jun11 Jun12 Jun13 Jun14 Jun15 Jun16 Jun17 Jun18 the past three calendar years. clearly been negative.” Source: FE Analytics

FE TRUSTNET trustnet.com In focus 32/ 33 [ PENSION ]

This young fund aims to take advantage of the improving dividend culture in Japan

while the fund is still untested in “Ideas are generated from the team’s different market conditions and a own research, company meetings and Baillie Gifford full economic cycle, it has plenty from interaction with other Baillie of features to suggest it will be a Gifford investment teams.” Japanese Income “promising long-term­ strategy”. Baillie Gifford Japanese Income “The fund is managed by a team Growth has made 43.47 per cent since with an impressive record of investing launch compared with 36.72 per cent Growth in Japanese equities,” it said. from its IA Japan sector.

FACT BOX apan is a region that has of payouts to shareholders, compared MANAGERS: Matthew Brett & Karen See / LAUNCHED: 04/07/2016 / FUND SIZE: £458.54m / traditionally been overlooked with more than half from the UK’s OCF: 0.63% J by income investors in the UK, top-10. This low concentration gives but reforms implemented by prime fund managers the freedom to pick FE CROWN RATING N/A minister Shinzo Abe mean that this the stocks they want while still is changing. yielding above the market. The introduction of the Companies One fund set up to take advantage PEFORMANCE OF FUND VS SECTOR SINCE LAUNCH Act in 2015, which requires Japanese of these conditions is Baillie Gifford businesses to have at least two Japanese Income Growth. Despite Baillie Gifford Japanese Income Growth (43.47%) independent directors on their board, being relatively new – it was IA Japan (36.72%) has led to greater transparency and launched in 2016 – it has already made them more responsive to amassed £458.54m in assets under 50% shareholders. management. 40% In particular it has led to an increase The fund benefits from the expertise in the amount of capital being of Baillie Gifford’s equity team and 30% returned to shareholders, which, its well-tested growth investment combined with large amounts of cash philosophy. Manager Matthew Brett 20% on company balance sheets, has made also runs Baillie Gifford Japanese, a Japan attractive to UK investors such consistent top-quartile performer. 10% as pensioners looking to diversify Baillie Gifford Japanese Income 0% their sources of income. Growth has a bias towards financials, There is another reason why Japan manufacturing & machinery and -10% is attractive from this point of view. commercial services. Oct Dec Apr Jun Aug Oct Dec Apr The top-10 dividend-payers in the The team at Square Mile Investment Aug16 Feb17 Feb18 market account for just 21.2 per cent Consulting & Research said that Source: FE Analytics

FE TRUSTNET trustnet.com In focus 34 / 35 [ TRUST ]

Alexander Darwall’s trust has ridden out various crises in Europe over the past decade to more than treble investors’ money

consumer services, financials, remains attractive on a long-term view Jupiter European technology and basic materials. and believe that its shares are capable Jupiter European Opportunities of trading at a premium to NAV.” is currently trading at a discount The trust’s maximum gearing is 45 Opportunities of 0.4 per cent, which the team at per cent, but the current figure sits at Winterflood noted is the tightest in 5 per cent. It has a performance fee of its sector. However, it added: “We 0.66 per cent on any excess returns continue to believe that the trust above that of its benchmark.

lthough the macro outlook would have lost if they bought and FACT BOX for Europe has been revised sold at the worst possible moments – MANAGER: Alexander Darwall / LAUNCHED: 20/11/2000 / PREMIUM/DISCOUNT: -0.4% A sharply downwards in stand at 23.59 and 55.56 per cent over OCF: 0.99% the past few months, this doesn’t this time. necessarily mean investors should Darwall is more interested in FE CROWN RATING steer clear of the region. For example, fundamentals than valuations. Before despite the numerous headwinds that looking at the financials of a company, PERFORMANCE OF TRUST VS SECTOR AND INDEX OVER 10YRS have buffeted the continent over the he considers whether it has sound past decade – including the financial business characteristics such as high IT Europe (131.88%) FTSE World Europe ex UK (80.68%) crisis, the sovereign debt crisis, barriers to entry, identifiable structural Jupiter European Opportunities (282.66%) Brexit and the growth of populism – growth trends and an open and honest numerous fund managers have still management team. 300% managed to deliver outsized returns. According to Darius McDermott, 250% Alexander Darwall is one example. managing director at Chelsea Financial 200% The FE Alpha Manager’s Jupiter Services, Darwall places an emphasis European Opportunities trust has on managers with “skin in the game”. 150% made 282.66 per cent over the past 10 “He looks for high-quality growth 100% years, compared with 131.88 per cent names where the managers have a 50% from the IT Europe sector and 80.68 decent stake, because he believes if per cent from its FTSE World Europe ex they are invested themselves, they 0% UK benchmark. are less likely to be reckless with their -50% However, this strong performance capital,” he said. -100% has not come without risks. The The trust is focused on cyclical trust’s volatility score and maximum sectors, with nearly three-quarters Jun08 Jun09 Jun10 Jun11 Jun12 Jun13 Jun14 Jun15 Jun16 Jun17 Jun18 drawdown – the amount investors of assets invested in industrials, Source: FE Analytics

FE TRUSTNET trustnet.com In focus 36 / 37 [ SECTOR PROFILE ]

Anthony Luzio says direct-lending trusts could offer diversification away from traditional debt investing in the form of bonds – and a much higher yield, too The debt collectors

he asset management The middle man diligence ourselves industry doesn’t do itself “When a bank syndicates a bond and on everything that many favours when it places it with a bunch of investors, comes through T comes to transparency. the bank is obviously taking a fee the door.” And it is not just on controversial for that. Direct lending cuts out the He adds that issues such as high management fees middle man, the theory being that more specific where it likes to muddy the waters – it the investor gets more of the return.” to RM Secured often uses jargon for no discernible Pietro Nicholls, manager of RM Direct Lending reason when a simpler word or phrase Secured Direct Lending, says the rather than would work just as well. benefit of this approach is that it the wider asset Take AIC Sector Specialist: Debt. allows the lender to specify the terms class is the type of Any sector with the word “specialist” they want, helping to reduce risk. documentation that in the title will automatically make “We originate and sort all our the trust includes. many investors wary, and is unlikely to investments in house,” he explains, tear them away from traditional debt “so while we may work with “Lovely due diligence” investing in the form of bonds, an asset advisers, and they will always be “There’s a lawyer sitting there class that currently accounts for a fifth on the opposite side of the table with us, there are accountants and of Investment Association assets. representing those borrowers’ a consultant, and each one of those However, Markuz Jaffe, investment interests, we’re performing that due produces a lovely due diligence report,” companies analyst at Cantor he continues. “There are key aspects Fitzgerald, says the sector couldn’t be of those reports that provide clarity easier to understand. This is mainly direct on the assets that loans are secured “This is mainly direct lending, lending, meaning it cuts out against, the business, corporate meaning it cuts out the intermediary governance, accounting and things like which has traditionally been the the intermediary which has that. That gives us the comfort to go bank,” he explains. traditionally been the bank and lend against those businesses.

FE TRUSTNET trustnet.com In focus 38 / 39 [ SECTOR PROFILE ]

“It is really kind of saying SECTOR RISK AND PERFORMANCE FIGURES OVER 5YRS “It is really kind of saying ‘we know ‘we know where this Name Max drawdown (%) Volatility(%) Total return (%) where this business is going’ and if it business is going’ and if goes into a downside scenario we have IA Global Bonds -5.76 5.07 15.12 a recovery strategy from the outset. it goes into a downside IA Global Emerging We are not at the whim of anyone else, scenario we have a recovery Markets Bond -12.61 8.59 10.58 which I think is important.” strategy from the outset” IA Sterling The sector also contains trusts such Corporate Bond -5.12 3.86 21.4 as NB Global Floating Rate Income, which invests in loans that are IA Sterling High Yield -8.14 3.35 20.24 arranged by banks and syndicated Because loans to small- and medium- IA Sterling to institutional investors, as well as sized enterprises (SMEs) are classed Strategic Bond -4.52 2.37 18.27 platform lenders such as P2P Global as higher risk, banks now have to set IA UK Gilts -9.47 6.7 24.66 Investments and Funding Circle. With aside more capital when lending to IT Debt -8.18 3.5 20.87 these, investors are exposed to tiny this area of the market. This means portions of thousands of loans that that from a capital return point of view, Source: FE Analytics the platform has made to businesses, they will make more money and a giving instant diversification. higher margin by focusing only on the the issuance of senior debt placed into to 12 per cent to maturity and we are larger end of the market. the capital market, the fund is able to able to pass on to the investor most of Access denied refinance a large part of that capital that return in a dividend of 8 per cent.” One thing that unites all of the Basel benefits below 1 per cent. This means the actual trusts in the sector, however, is Fery says 90 per cent of the yield of the assets we hold exhibits close “A harsh trade-off” that they typically lend to smaller opportunities his fund is pursuing This sort of return does not come companies that don’t have access – either by acquiring portfolios without risks. Jaffe notes exposure is to the bond market – to start with, of loans from European banks or mostly to the downside, as the best investors generally aren’t interested lending directly to companies across outcome of lending someone money in bonds that are less than £10m, but the continent with the aid of local is they meet their loan repayments more importantly, tighter banking partners – have arisen as a result of and return the principal. regulations have made it less these regulatory changes. And the “But if on day-five the company goes profitable to lend to companies of manager says the benefits of Basel III bust, you will lose everything, so it is this size. don’t stop there. quite a harsh trade-off,” he says. “And “Basically, there has been a transition “Under that new regulation, there where the portfolios might have only from Basel II to Basel III,” says Loic is an opportunity for loan originators 100 loans, with some of them being up Fery, manager of the Chenavari Toro like us to access cheap term funding in to 5 per cent of the portfolio, a single Income trust. “That changed the front of those loan portfolios,” he adds. blowout can have quite a big impact.” amount of capital that banks need to “The majority of what we originate has retain on every loan they make.” a yield of 5 to 8 per cent, but through

FE TRUSTNET trustnet.com In focus 40 / 41 [ SECTOR PROFILE ]

The analyst adds that this is much investors to get their less likely to happen in a bond fund head around. as larger companies have asset 6.4%6.4% “If you wanted to protection and can also tap up the AVERAGE DIVIDEND put a small exposure equity markets. YIELD OF THE IT DEBT to debt in your “So direct lending trusts are SECTOR portfolio to pick up higher risk to a certain extent,” he that yield premium, continues. “It is also harder to work I would see that as a out what happened when things way of offsetting a large to go wrong, because you can’t just than the figures for IA UK Gilts and allocation to traditional look at the bond markets to draw the comparable with most other open- fixed income where yields correlations as to why your fund’s ended bond sectors. have gone to depressingly price has been dipping.” low levels over the past few Despite these risks, data from The flip-side years,” he adds. FE Analytics shows the sector’s Jaffe says the flip-side is that there is a Despite the industry’s love maximum drawdown and volatility nice yield on offer – the sector average of jargon, that is something score of 8.18 per cent and 3.5 per currently stands at 6.4 per cent – and that income investors will find cent over the past five years are less the concept is not too difficult for it all too easy to understand.

compensating investors.” The turnaround: The chosen one: US and Europe. The focus Platform change: and the maturity profile of However, Numis is wary VPC Specialty Lending Funding Circle SME is on lending to the smaller SQN Secured Income the fund’s platform loans While this trust’s of the trust: “The balance Income end of the SME market, an Winterflood says are both consistent with performance since launch sheet approach leads to This trust is currently area that is underserved by that since taking over the planned strategy to has been lacklustre, Jaffe a focus on early-stage Numis’s favoured play in large banks. “Despite their management of this trust, reduce platform exposure notes it is reallocating platforms and high interest the sector. “We believe the small size, borrowers are SQN Asset Management to 20 per cent of the overall capital towards the rate/high default platforms, trust offers an appealing established businesses, with has made good progress portfolio,” it says. Jaffe adds manager’s area of expertise. with a bias towards US yield and benefits from an average trading history in rebalancing the that while performance “It’s an interesting consumers. After problems an attractive fee structure of about 10 years (minimum portfolio away from an has failed to live up to turnaround story,” the with Borro, it now has with no management or two years), and average SME investment platform expectations – it has made analyst adds. “It sits on a equity-like exposure to performance fees at the turnover of £900k for UK and towards loans it has just 6.65 per cent since double-digit discount [11.5 this struggling platform, fund level,” the group says. borrowers,” Numis adds. written itself. “Direct loans launch in September 2015 per cent] and the yield is which gives the fund a very Funding Circle SME Income The trust is yielding 6.25 per have increased and now – this is another trust that 10.23 per cent. It is buying different risk profile to debt offers diversified exposure cent and is on a premium of represent 36 per cent is turning itself around. It back shares, so it is being investments secured on to a portfolio of about 7,700 4.4 per cent. It is up 15.84 of the portfolio and the is on a discount of 6.12 per proactive about getting the loans originated through loans originated via Funding per cent since launch in chairman notes that the cent and is yielding 6.89 share price back up and the platform.” Circle’s platforms in the UK, December 2015. pipeline of transactions per cent.

FE TRUSTNET trustnet.com In the back 42 / 43 [ PLATFORMS & PENSIONS ]

AltRetire’s John Blowers weighs up the options for anyone whose retirement strategy is disrupted by a redundancy late in their working life Best laid plans

ow we’re leaving Europe, in one or two companies, but maybe the good old now they tend to work for many days will come back. more. But the biggest shocker N You remember. The is that, despite your best efforts days when you worked hard for a in pension planning, you may company all your life and on your find yourself out of a job before 65th birthday, you’d be ushered in to your target retirement date – and Many people are beginning The problem is that if you retire the boardroom for a glass of bubbly I’m beginning to believe this is more to discover that not only earlier than you originally planned, and a gold watch before being packed common than one might expect. there’s the “double-whammy” of off to enjoy your final salary pension And, with, the retirement age will their working lives end contributing less to your pension, for another 10 years or so. set to move from 65 to 67 in the sooner than they planned, while starting to spend it earlier. Times have changed and I suspect coming few years, many people While this isn’t such a big deal if you that the good old days will never are beginning to discover that not but the retirement age (and have a final salary scheme, it is likely return. Not only have final salary only will their working lives end state pension) are also to cause more problems if you have a pension schemes disappeared faster sooner than they planned, but the getting further away defined contribution pension. than shops from the high street, but retirement age (and state pension) I thought it would be useful to look we’re also living much longer. A “good are also getting further away. at a scenario as to how an unplanned innings” used to be living until you Many of my friends in their mid- Most, if not all, think they will be early retirement situation can affect were 80, but now it’s much more likely 50s seem to have found themselves comfortable even if they never have your provisions and what can be done that you will pop off in your 90s. in a situation where they have ended to work again, but there is no doubt to combat this growing problem. But what has really changed is how up leaving the companies they that it has had a dramatic impact on we work. People used to build a career planned to work for until retirement. their retirement plans.

FE TRUSTNET trustnet.com In the back 44 / 45 [ PLATFORMS & PENSIONS ] Case study TOP TIPS FOR AN

Roger, 57, was told he was £600K Roger’s original plan was to UNPLANNED EARLY RETIREMENT being made redundant retire at 66 and take £3,000 £500K per month from his pension. He was due to contribute as part of a series of cost- £1,000 per month until Replace income retirement cutting measures at his firm. £400K It may sound like an obvious thing The aim is to do everything He had already saved to do, but getting another job is the possible to stop you dipping £300,000 into his pension £300K best possible solution. When you’re into your retirement fund and planned to maintain £200K older, it’s sometimes difficult to his £1,000 per month imagine anybody wanting to take until you absolutely have to contributions until he retired £100K you on, but you’d be surprised. at 66. Unless he can find There are a number of jobs suited 0 a new job to fund these 57 67 77 87 97 to older, more experienced people, pay your monthly outgoings and contributions while covering Upper Rate 7% Middle Rate 5% Lower Rate 2% notably consulting, non-executive contribute into your pension (even living expenses, he will directorships or even starting a small if it’s not as much), then you should be forced to dip into his £350K business such as a B&B. You may end be able to stick to your original Being made redundant at 57 pension pot. means that, if he retires now, up doing something less stimulating retirement plan. The aim is to do £300K he can only draw £1,150 per month to make his money last The combination of ceasing the same time (£1,850 less a for less money than you are used to, everything possible to stop you pension contributions £250K month than his original plan) which may be a bitter pill to swallow, dipping into your retirement fund and dipping into his pot £200K but remember what you are trying to until you absolutely have to. nine years early reduces achieve in the longer-term. If you can £150K his sustainable income in earn enough to get by and leave your Take more risk – retirement from £3,000 per £100K pension untouched, you’ll be doing keep your pot growing month to just £1,150 per your long-term prospects a power As you can see from the graphs in £50K month: a drop of £1,850. of good. If you can earn enough to Roger’s scenario, the difference in This was the plan: this 0 outcomes against growth levels is 57 67 77 87 97 would have generated significant. Retirement pots that grow Upper Rate 7% Middle Rate 5% Lower Rate 5% £3,000 of income per at 2 per cent just don’t last very long, month. Note the effect of yet popular wisdom dictates that taking more risk through of taking more risk through be as much as £164.35 per you should de-risk your portfolio retirement – potentially retirement – potentially week (as at 01/06/18). as you prepare to stop working extending pension income extending pension income However, all is not lost so you can live off the income by up to 20 years. by up to 30 years. – read my tips on how to it generates. If you find yourself By retiring nine years early, Note I have not included make the most of your with a smaller pension pot than sustainable income falls the state pension you may situation should you find you planned, then risk is one from £3,000 to £1,150 per be entitled to, which, after yourself “retiring” before you month. Again, note the effect your retirement date, could planned to.

FE TRUSTNET trustnet.com In the back 46 / 47 [ PLATFORMS & PENSIONS ]

Difference in life expectancy at birth from 1909, thing that you can control. Last month 28 years when first state pension was paid, and today we discussed how risk can be your ally, EXAMPLE OF STATE but you need to feel comfortable with the concept. I’m not suggesting taking PENSION SUMMARY crazy risks – just aim to achieve 7 to You can get your State Pension on 10 per cent growth by using higher- 16 September 2031. Your forecast is... risk funds in a balanced portfolio. Moving your pension into cash is Downsize and invest in managing your investments, you one of the worst things that you can £164.35 a week If you’re in your late 50s, the chances can transfer your existing pensions do as you are effectively robbing are that any children that were filling to a SIPP. Here, you can more easily £714.63 a month / £8,575.55 a year yourself of up to 30 years of stock your house and emptying your fridge manage your investments, make market growth. will have left home. You may also further regular or ad hoc contributions Your forecast: have lived in a location convenient and take money out as and when you Don’t dip into your pension Is not a guarantee and is based on for your former workplace. need it once you are 55 years old. There is a strong temptation to access the current law This might be the time to liberate your retirement savings as soon as some profit from your home, Check your retirement date Does not include any increase due you can, but you need to resist this replacing it with a cheaper-to-run The times are changing and so is to inflation urge. It is the equivalent of finding property in a lower-cost area, before the retirement age, which means it’s yourself out of work earlier than you You need to continue to contribute National investing the proceeds back into your going to be an extra year or two before Insurance to reach your forecast planned, as you switch from investor pension to get it back on track. you can get your hands on the state to spender. Even worse, the rules Estimate based on your National Insurance pension. It is worth checking when allow you to take 25 per cent tax-free record up to 5 April 2018 Try to maintain regular you will be able to access this. from your pension at the age of 55, £150.54 a week pension payments testing the willpower of even the Forecast if you contribute another 3 years If you find yourself on the skids Check you will receive most self-disciplined investor. If you before 5 April 2031 and can’t find another suitable job, a full state pension do dip in to your pot, try to reinvest £164.35 a week then maintaining your pension Don’t avoid looking. I just took a peek any money you take out. contributions may seem like a tall and it wasn’t as bad as I thought. Finally, if you find yourself relying on order. If you had a company scheme, The government website will show your pension pot for an income, don’t you may not even know how to you whether your National Insurance take out any more than is absolutely Work out how much you maintain payments. However, I cannot payments are up-to-date and whether necessary, so avoid paying yourself a will need and take only stress enough how important those last you will receive the full state pension. fixed amount each month. Work out that amount out of your few years of contributions are to your You will need your Government how much you will need and take only long-term wellbeing in retirement. Gateway password, if you have one, or that amount out of your investments, investments, leaving the In some cases, provided you are not in your National Insurance and passport leaving the rest to grow. rest to grow a final salary scheme and are confident numbers if you don’t.

FE TRUSTNET trustnet.com In the back 48 / 49 [ STOCKPICKER ]

A period of upheaval in European Airlines are now also airlines has created opportunities proving more adept at using across the tourism industry, says their customer data to sell SVM UK Growth’s Margaret Lawson hotels, car hire and other Up in travel services the air

ising oil prices pose a their customer data to sell hotels, challenge for the travel car hire and other travel services. R sector, but in other ways, Passengers have already seen a range prospects are improving. Pricing of hidden price rises in the form of discipline is being reinforced as seat selection and luggage charges struggling airlines such as Monarch and in this environment, additional and Air Berlin disappear, while costs such as fuel can be more the acquisition of their slots has readily passed on. The remaining enhanced the prospects of survivors businesses are creating an industry such as . Airlines are now that looks much more attractive for also proving more adept at using shareholders.

strengths. The company is to multi-year growth op- 66 million unique visitors building considerable value portunities. Wizz Air has to its website. It has ben- RYANAIR through leveraging the WIZZ AIR demonstrated good capital efited from the penetra- Many analysts predicted brand as it begins to make Wizz Air is the largest low- discipline, while the future ON THE BEACH tion of mobile apps which that Ryanair’s brash style better use of its customer cost airline in central and fleet expansion in 2020 and On the Beach is one of the has allowed the business and apparent indifference data. Given that Ryanair eastern Europe and is also the recent award of a credit UK’s leading online retail- to scale quickly. Over time to customer care would received more than 1 bil- one of the fastest growing. rating will further improve ers of beach holidays, in- this should create a cycle of come back to haunt it. lion visits to its website and Strong economic growth the cost profile. With the creasing market share from high margins and high re- However, this misses the app in the past year, and is in the CEE region, rising potential to expand in core 9 to 22 per cent since 2011. turns, as brand penetration point: Ryanair’s scale and forecast to fly 139 million disposable income and markets and further afield, The group has grown into accelerates in the domestic lowest-cost carrier position passengers in 2020, the po- growing demand for lei- the group is well positioned a nationally recognised market and the group ex- in Europe are its greatest tential is significant. sure travel are giving rise for above-average growth. brand and in 2017 received pands internationally.

FE TRUSTNET trustnet.com In the back 50 / 51 [ WHAT I BOUGHT LAST ]

AJ Bell’s Ryan Hughes says this fund offers diversification away from the “hype and hysteria” of the equity market Given its focus on income generation, the investment Premier Global strategy has a clear bias towards infrastructure companies that pay a Infrastructure Income high and sustainable dividend

he infrastructure invest in the Premier that have the ability flow and have a high current size of the fund, space has been Global Infrastructure to quickly raise their visibility of revenue at just £70m, means T growing in Income fund, run by the dividend. These firms, that benefits from long- it is nimble enough to popularity in recent experienced partnership often found in emerging term regulation. We take advantage of any years, but remains a of James Smith and markets, can account like the fact they do not opportunities that arise relatively specialist area Claire Long. for up to 20 per cent take chances with the in this space. with few investments to of the portfolio, as underlying commodities choose from. High and rising can exposure to fixed or take any construction ”Relatively unexciting” However, infrastructure Given its focus on interest. risk, instead buying While many investors companies have many income generation, the The focus on income existing assets. This may see utilities as attractive characteristics investment strategy positions the fund should help to protect relatively unexciting, that mean they can has a clear bias towards the regulated investors’ capital. this is exactly the reason bring diversification towards infrastructure utilities across the The fund has many why we are happy to to a portfolio and companies that pay a world, incorporating attractive features. A hold this fund in our complement other high and sustainable electricity and water. yield of more than 5 per portfolio. We want it equity holdings. dividend, with a However, the rapidly cent, paid quarterly, to slowly tick over, In our recently likelihood that these will developing renewables makes it suited for consistently paying out launched Income be found in developed market is also becoming our income portfolio. an income and offering Managed Portfolio markets. These typically an important part of the The stability of the good diversification Service (MPS), we have make up between 60 portfolio. infrastructure sector away from the hype taken a long-term and 100 per cent of When looking for makes the approach and hysteria that can strategic position in the strategy. However, opportunities, the appealing, while market accompany more infrastructure with there is room for growth managers take an correlation is also lower fashionable parts of the Ryan Hughes is head a specific focus on too, with the managers intuitive approach, compared with our market. If it manages of active portfolios at income generation. looking to identify focusing on companies other equity holdings. this, we will be very AJ Bell This has led us to younger companies that generate free cash Furthermore, the happy holders.

FE TRUSTNET trustnet.com July preview Old before their time

July’s edition of FE Trustnet Magazine will focus on pensions and specifically the Junior SIPP. While putting away some cash for your child’s future is never a bad idea, is dumping it in a wrapper that will prevent them from accessing it until they are 55 taking it a step too far?

Our sector profile will fall on IA Flexible Investment. Now the market cycle is entering its final stages, it may be a good idea to take some risk off the table – but with correlation across asset classes so high, how are fund managers doing this?